Economic issues take centre stage

In the next few weeks, the Government will unveil the 11MP Mid-Term Review and Budget 2019 amid tough global conditions.

SEVERAL events this month will put the spotlight on economic issues in Malaysia and globally.

On Oct 18, the Mid-Term Review of the 11th Malaysia Plan (11MP) will be presented in Parliament.

After last week’s Cabinet meeting had discussed it, the Economic Affairs Ministry put the finishing touches and finalised the document.

Economics Affairs Minister Datuk Seri Azmin Ali had earlier promised that the report would set a new direction for the economy. He added that it would focus on increasing incomes of the bottom 40% of households.

Naturally, Malaysians are eager to see if the review promotes new ideas and what development programmes will be funded. They also want to know if there will be shifts in priorities for growth, income distribution and balance within and between sectors, states and socio-economic income groups.

The Malaysia Plans are for five years, with each of the mid-term reviews giving the framework and budget plan for two to three years.

But it is the policy direction, that go beyond a couple of years, that will be significant, especially since this is the first Pakatan Harapan exercise in development planning.

On Nov 2, Finance Minister Lim Guan Eng will present his maiden federal budget. The time frame is shorter than that of the 11MP Mid-Term Review, but it will have more immediate effect – first, through specific tax-related changes, and second, through the level and type of expenditure.

Most Malaysians will be more interested in the tax aspects as these directly affect our income and daily lives, while economists will pay more attention to the size of expenditure and the budget deficit.

Here, the minister and the government will have to do a difficult balancing or juggling act.

On one hand, the federal government debt has been discovered to be significantly higher than previously reported; the figure of RM1 trillion is now widely used.

If different definitions are used, the government debt would be lower by a couple of hundreds of billions, but it would still be much higher than what it should be.

To bring it down, projects have to be cancelled or postponed. Wasteful expenditure must be trimmed, and even useful expenditure may be capped at slow or zero growth.

Ministries and agencies are all affected, and they are probably still bargaining with the Finance Ministry on their budget allocations.

From a finance point of view, the aim is to control debt and prevent the budget deficit from increasing from the present 2.8% of GDP.

The latter would be no mean feat, since revenue will fall due to the replacement of the good and services tax (GST) with the sales and service tax (SST).

Also, unpalatable expenses have to be met for the servicing of the 1MDB debts and to plug holes or missing money, including refunds for GST payments and overpayment of income tax.

On the plus side is the rising revenue due to the increase in oil prices (now US$75-US$80 a barrel).

Overall, we can expect government expenses to be squeezed to make way for the abuse, misuse and overuse of funds of the previous government.

Prime Minister Tun Dr Mahathir Mohamad and the Finance Minister have already warned that the public has to make sacrifices.

But here’s another dilemma. If there is a tight budget, with less government spending, this will dampen the economy’s “effective demand” when economic growth is already slowing.

Usually when the economy is slowing down, government increases its expenditure to give it a boost.

But with the government aiming to control both debt and the budget deficit, there’s not enough money to give the economy a shot in the arm.

The public may understand the need for a “tight budget”, but if this crosses into an “austerity budget”, it will become unpopular when implemented. Thus, the need for balance and juggling.

One rule of thumb is that since there is need for sacrifice, let it be the upper and upper-middle classes that are called on to take the brunt, whether it be in extra taxes or government spending cuts.

The bottom 40% should be protected, or their interests could even be enhanced. This has been promised in the preparation of the 11MP Mid-Term Review, and the one-year budget is, after all, 40% of the period of the rest of the 11MP.

“Inclusivity” is a new catchword now frequently used. That should mean that the interests of the poorer Malaysians are included and indeed prioritised in the budget and the new Plan.

One further complication is that there is now growing agreement that the global economy is in pre-crisis trouble. In its annual economic outlook, the International Monetary Fund last week warned that “large challenges loom for the global economy to prevent a second Great Depression”.

IMF head Christine Lagarde warned that the rapid build-up of debt made governments and companies of developing countries more vulnerable to higher interest rates, which could trigger a flight of funds and destabilise their economies. This should serve as a wakeup call.

Some top economists are now in Kuala Lumpur for Khazanah Nasional’s Megatrends Forum 2018, with Nobel laureate Joseph Stiglitz giving the keynote speech.

Another speaker, former chief economist of the United Nations agency UNCTAD, Yilmaz Akyuz, gave talks in Putrajaya and KL last week in which he predicted that four events combined can lead to a serious crisis in developing countries.

These are a debt default in Argentina or Turkey, the Trump trade war, a hike in interest rates, and a strong dollar. The last three are already taking place.

He called on developing countries to start examining policies to respond to the worsening situation, while noting that the same policy measures may now have less positive effects than in previous crises.

We look forward to important exchanges of views during the Megatrends Forum. And we eagerly await the presentation of the Mid Term Review and Budget 2019.